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Drug Channels delivers timely analysis and provocative opinions on pharmaceutical economics and the drug distribution system. It is written by Adam J. Fein, Ph.D., one of the country's foremost experts on pharmaceutical economics and channel strategy. Drug Channels reaches an engaged, loyal and growing audience of more than 26,000 subscribers. Learn more...

In addition to its retail operations, Alliance Boots is one of the three largest drug wholesalers in Europe. Readers of this blog may recall that its UK division (Alliance Unichem) is working with Pfizer to consolidate UK product distribution. (See Pfizer's UK Deal: Change is Here!)

The reality of global drug distribution is getting closer, but the big US wholesalers – AmerisourceBergen Corp (NYSE:ABC), Cardinal Health Inc (NYSE:CAH), and McKesson Corp (NYSE:MCK) – remain on the sidelines. How much longer can they afford to wait?

Friday, January 26, 2007

All three big wholesalers -- AmerisourceBergen Corp (NYSE:ABC), Cardinal Health Inc (NYSE:CAH), and McKesson Corp (NYSE:MCK) -- posted strong results this week. But as Heather Won Tesorio points out in today’s Wall Street Journal: “All of the so-called ‘Big Three’ are reassessing their businesses and making efforts to return to their roots” in drug distribution. (See Cardinal, Refocusing on Core, Sells a Unit.)

There are very few wholesalers left to acquire in the U.S. So how could wholesalers grow their distribution businesses faster than market growth?

Here are three possible strategies that I am tracking, in order of riskiness:

1. Vertical integration -- Vertical integration would allow growth within drug distribution by giving wholesalers more control over their customer’s sourcing decision. This is already happening with the integration of oncology care and specialty products distribution. (See The 3PL vs. Wholesale battle heats up.) As I noted a few weeks ago, I also would not be surprised to see a Big 3 drug wholesaler acquire or merge with an acute care GPO. (See 2007 Trends: Integration (1 of 4).

2. Europe -- In my very first blog post last May, I speculated about a merger between a US and a European drug wholesaler. (See US wholesalers look to Europe.) You probably don’t recall the post because I only had about 3 readers back then. It's still a possibility, especially if the importation bill moves ahead.

3. China -- The Chinese government has been talking about consolidation for a few years now. This article caught my eye yesterday: China's wholesale drug channels to experience major changes. Foreign companies are already making inroads there. Interpharma, part of European company Zuellig Pharma, is the largest foreign company in the Chinese market right now. Beijing Med-Pharm is a US-based company that has been acquiring Chinese distributors. Is there a place for a U.S. wholesaler in China? Perhaps, although one Asian executive told me that the regulatory/political environment and business ethics in other parts of the world would be a big hurdle for the Big 3.

None of these strategies will be easy to execute, but all three reflect logical next steps for the drug wholesaling industry.

Wednesday, January 24, 2007

Is Senator Dorgan using RFID to push his importation bill? Here’s some conspiracy thinking to chew on.

I came across a press release announcing the formation of the RFID Technology Council, an alliance of eight technology trade groups. One objective of the group is to support the U.S. Senate RFID Caucus.

Here’s the twist: Senator Dorgan is also co-sponsoring the drug importation bill introduced two weeks ago in the Senate! (See Real News about Fake Drugs.)

Random coincidence? I doubt it.

Supply chain security is one (of the many) hurdles to importation. But check out this statement from Senator Dorgan’s web page about his importation bill: “The basic approach to assuring the drugs are safe in this bill is to give FDA the ability to verify the drug pedigree back to the manufacturer, to require FDA to inspect frequently, and to require fees to give FDA the resources to do this.”

Click! The belief that RFID is just around the corner could help to sell importation legislation.

Think about it -- the FDA has been fanning the flames of RFID hype for three years. Remember this quote from last June’s FDA report: “The technology vendors uniformly told us that their RFID and e-pedigree solutions and technologies are ready to go, but manufacturers, wholesalers, and retailers are slow to implement them.” (See FDA blind to the supply chain’s evolution.)

The RFID Technology Council helpfully removes the middleman and allows technology vendors to deliver the hype unfiltered to Senators looking to “validate” track-and-trace. In other words, Senator Dorgan is now in the perfect position to develop “evidence” that RFID solves any safety problems with importation. Believing is seeing!

Of course, Dorgan et al are dreaming if they think the FDA (or anyone) can monitor 4 billion prescriptions dispensed from 160,000+ locations while simultaneously enforcing pedigree rules with thousands of wholesalers. But I view this coincidence as another dangerous step toward endangering public health by opening up diversion doorways for criminals.

Has anyone else put the pieces of this puzzle together yet? Or do I sound like one of the Lone Gunmen?

To be honest, I’m surprised that Wal-Mart Stores Inc (NYSE:WMT) has not added simvastatin to its discount list yet. I suspect that they are waiting for a more auspicious time to announce the move, such as when the news about Part D direct negotiations dies down. I predicted this move in November, so perhaps I’ll just keep repeating it until the prediction comes true.

Wal-Mart’s Real Impact

I still maintain that Wal-Mart's $4 generic program will hurt supermarkets, independents, and other discounters more than major chains such as CVS Corp (CVS) or Walgreens (NYSE WAG). The chains compete on convenience and service, so they are much less vulnerable because customers with third-party insurance do not save much versus standard co-pays.

Thus, I find Kmart’s move even more surprising since other discounters and mass merchants are backing off. Costco Wholesale Corp (NASDAQ:COST) ended its $4 drug plan in December while BJ’s Wholesale Club (NYSE:BJ) announced its exit from the pharmacy business.

Generic Sourcing Models

The generic economics of companies like Costco and BJ’s are not comparable to Wal-Mart. There are at least two reasons that Costco can not source generics as cheaply as Wal-Mart.

Lower volumes -- Rx sales at Wal-Mart are more than 10 times sales at Costco, while BJ’s had less than $60 million in total Rx sales.

Wholesaler margin -- Costco buys generics through a wholesaler (McKesson Corp). Wal-Mart buys generics directly from the manufacturer, just like the larger chains and PBM mail order operations.

Even so, Wal-Mart does not necessarily get the best price on generics. Wal-Mart buys lower volumes of generics than the big 3 wholesalers -- AmerisourceBergen Corp (NYSE:ABC), Cardinal Health Inc (NYSE:CAH), and McKesson Corp (NYSE:MCK), McKesson Corp – and lower volumes than the large chains -- CVS Corp (NYSE:CVS) and Walgreens (NYSE:WAG).

Nevertheless, Wal-Mart’s product acquisition costs are still lower than the independents and supermarkets that buy through wholesalers. I also estimate that Wal-Mart has been able to add the incremental pharmacy volume with little incremental dispensing costs. (See my analysis from December: Sloppy reporting about Wal-Mart).

What’s Next?

I think Wal-Mart has a much larger plan to take pharmacy market share away from supermarkets and independents. Check out their new Neighborhood Market store design – it looks like a pharmacy chain to me, not a big box. (Unfortunately, I no longer have a need for the "celebrity hairstylist" who was there to celebrate the new store design.)

Tuesday, January 16, 2007

I will be delivering the State of the Industry opening address at this year’s TRAX Pharmaceutical Supply Chain Integrity conference in May. My talk is called “Building a Truly Secure Supply Chain to Drive Patient Safety.” And unlike this blog, you’ll get to see me live and in color. (Hopefully, a good thing...)

If you check out the agenda, you'll realize that this will be a great event for anyone with an interest in the future of the pharmaceutical supply chain. There will be speakers from Pfizer Inc, Genzyme Corp, Merck & Co, Cardinal Health Inc, Bristol-Myers Squibb Co, Eli Lilly and Co, and Boehringer Ingelheim. Other speakers come from regulatory agencies and technology companies. IMO, the informal conversations and interactions among all these groups will really make the event worthwhile.

Sunday, January 14, 2007

Last week brought an unprecedented motherload of counterfeit-related press releases and news stories. Line them up side by side and you’ll understand why most companies will be forced into DIY Supply Chain Security.

The next day, EPCglobal ratified an international standard format for an electronic pedigree document. (Did anyone else besides me attend a celebratory pedigree bash this weekend?) The theoretical benefit of an ePedigree standard will be interoperability across the supply chain, most importantly (in my view) from wholesalers to retailers. SupplyScape, which now claims to be the “inventor of the electronic pedigree solution for the pharmaceutical supply chain” (can that be true?), issued follow-on press releases on both Thursday and Friday.

RxUSA (of PDMA-injunction fame) also jumped into the fray last week with its own 24-point plan for supply chain security, including their call for a "standardized Federal form for pedigree papers." This quixotic wish list is unlikely to get serious consideration, but I no longer doubt RxUSA's tenacity on these issues.

Unfortunately, we have to get retail pharmacies to buy only from wholesalers that supply pedigree in the very few states that have bothered to implement pedigree laws. (See Thank You for Buying Counterfeits.) SupplyScape claims that an impressive “200 million drug bottles” have electronic pedigrees already, but it’s not clear if a meaningful number are being read by dispensing pharmacies.

Savor the spin by comparing the NABP’s first bullet point about the Detroit indictment with the actual indictment, which focused primarily on cigarette diversion to avoid state taxes. (Thank you, Google!) Better yet, check out Doug Albers’ guilty plea on the DOJ website, which states: “Beginning in 2000, the Missouri Board of Pharmacy had advised Albers that he could not purchase pharmaceuticals from out-of-state distributors unless the distributor was licensed in Missouri. Albers admitted today that, despite those warnings, he had not taken any investigatory or prohibitory steps to confirm OTS Sales was only purchasing from Missouri licensed brokers.”

P.S. Last week’s rash of counterfeit-related news was overshadowed by the Medicare Part D debate. Many pundits, analysts, and bloggers have already commented on the Democrat’s legislative posturing, so I’ll refrain since I’ve already written about the issue previously on this blog. Check out Kaiser’s Daily Health Policy Report for a summary as of last Friday.

Sunday, January 07, 2007

Two weeks ago, Cardinal Health Inc (NYSE:CAH) said it agreed to pay $11 million to settle an investigation by New York Attorney General Eliot Spitzer’s office into improper trading of pharmaceuticals on the secondary market.

The actual Assurance of Discontinuance highlights internal communications about Cardinal’s historical activity with secondary wholesalers (a.k.a. Alternate Source Vendors). More significantly, the Business Reforms in the agreement also provide a roadmap for supply chain security that manufacturers and wholesalers should adopt with appropriate modifications.

A Peek Behind the CurtainsThe investigation turned up some very interesting internal information about Cardinal’s past activities before it renounced secondary market activity in 2005. (See “Findings” in paragraphs 1 through 18.) Here are two representative statements:

In a 2003 internal Cardinal e-mail to a compliance officer, one executive addressed the issue of “smaller vendors” which provided “unique opportunities” to Cardinal. Although acknowledging that the vendors are “high risk,” the writer concluded that “[s]ince we need the margin from these high risk vendors we will continue to buy from them.” (para 5)

At times, Cardinal purchased from sources despite indications that the vendors may have been unsuitable. For example, in January 2004, one employee examined the pedigrees that Cardinal was receiving, and noted suspicious sources in the chain of custody – in his words – firms “which could be bad.” The employee asked that a plan be put together to review those entities. A Cardinal compliance employee indicated that he had already verified that those entities were licensed as wholesalers. That verification was one appropriate step but insufficient. It does not appear that there was any further response to the request for review, nor that the suspect vendors were excluded. The Investigation has shown that some of the entities the employee identified were, as he suspected, engaging in diversion. Cardinal subsequently discontinued its business relationships with these entities. (para 9)

While reading these statements, please note the following statement in paragraph 22: “Cardinal is willing to enter into this Assurance without admitting or denying the OAG’s findings.” I have not personally reviewed any materials cited in the document. The Attorney General may have misinterpreted the meaning of these emails or taken the statements out of context. You should read the complete document yourself and make up your own mind.

Business Reforms The Business Reforms (Paragraphs 25 through 33) are the most thought-provoking part of the agreement. Cardinal agrees to:

Buy only from manufacturers and not from secondary wholesalers (28)

Sell only to wholesalers that certify compliance with “Wholesaler Safe Product Practices” (Appendix B) and pass appropriate pedigrees or pedigree information to all such Wholesalers when and as required by any federal or state law. (29.c.)

Create and execute a customer audit program to verify accuracy of certification (31.b.v)

The agreement also addresses the demand side counterfeiting problem (See Thank You for Buying Counterfeits) by requiring Cardinal to monitor customer more carefully. For instance, Cardinal must:

To me, it looks like Cardinal taking on the monitoring and enforcement activities that should be the responsibility of state boards of pharmacy. Are these business reforms a tacit acknowledgment that most state pharmacy boards are not doing their job?

A Modest ProposalThis agreement has special significance given the hubbub caused by the successful injunction filed by secondary wholesalers against the FDA’s planned implementation of the pedigree requirements of the PDMA. (See my December posts, such as No PDMA for you! and It's Official: PDMA is Back On Hold.)

While we wait for federal pedigree law to be settled (2007?) and an RFID-enabled track-and-trace infrastructure to arrive (2017?), I would like to make the following suggestions:

AmerisourceBergen Corp (NYSE:ABC), McKesson Corp (NYSE:MCK), and all other pharmaceutical wholesalers should voluntarily adopt the Business Reforms outlined in the agreement.

All secondary wholesalers should immediately certify their compliance with the Wholesaler Safe Product Practices in Appendix B.

Manufacturers should require all Authorized Distributors of Record (ADRs) to adopt the Business Reforms or lose ADR status.

Prior to authorizing any reimportation legislation, Congress should require all non-US pharmacies to certify their compliance with a retail-oriented version of the Safe Product Practices in Appendix B. (How about it, Senator Vitter? Check out Of Spammers and Senators first.)

I view direct negotiations for Medicare as a long shot for Speaker Pelosi’s first 100 hours. (The draft text of H.R.4 The Medicare Prescription Drug Price Negotiation Act of 2007 looks like meaningless window-dressing with limited impact on the marketplace anyhow.) However, Congress seems likely to focus on how companies within the U.S. pharmacy infrastructure make money, putting PBMs and wholesalers under greater scrutiny. I would not be surprised to see new Congressional hearings about contracts, rebates, and chargebacks.

The proposed AWP settlement, along with the ongoing litigation around this pricing benchmark, will create further heat. The Wall Street Journal is also adding fuel to the fire with its muckraking against the pharmacy infrastructure with year-end articles on taming middlemen and Omnicare Inc. The theoretical saving from universal health care will also focus attention on the pharmacy infrastructure -- just listen to John Edward's weekend remarks or read Sunday's article in (where else) The New York Times.

State and national governments had a mixed year in protecting the public from counterfeit drugs. Florida overcompensated for years of lax enforcement by finally implementing pedigree laws, although some last minute compromises created controversy. However, the FDA still couldn’t get the PDMA’s minimum standards implemented despite the U.S.’ crazy patchwork of regulation and inconsistent state-level enforcement. The international situation is even worse due to rampant parrallel trade. A new study by the U.K.'s Medicines and Healthcare Products Regulatory Agency claims that "...counterfeiters are targeting the UK's pharmaceutical supply chain, selling counterfeit drugs to wholesalers who supply the NHSclaims."

As a result, private companies are being forced to shoulder the burden of protecting the drug supply chain with a do-it-yourself (DIY) model. Manufacturers in the U.S. are already investing resources into gaining visibility into the movement of their product from factory to patient. Overseas, Pfizer Inc, GlaxoSmithKline plc, and AstraZeneca plc have all announced plans to overhaul drug distribution in the UK, Europe’s major destination for parallel imports. The Cardinal Health Inc (NYSE:CAH) agreement with the New York Attorney General’s office will force the wholesaler to take over monitoring and enforcement activities that would normally be the responsibility of a state pharmacy board. (I’ll say more about the agreement soon.) Even RFID, the most hyped supply chain technology since B2B exchanges, is being developed by private efforts, not government mandate.

I believe that we are on the verge of a political debate about the most cost-effective way to dispense drugs. Profits on generic drugs now subsidize the branded pharma supply chain for wholesalers, retail pharmacies, and PBMs products. Generic margins are under pressure, most immediately under the proposed AMP rules for Medicaid. (I’ll comment more on AMP shortly.) Wal Mart Stores Inc (WMT) generic price war, which is premised upon this retail profit model, will heat up once it adds newer blockbusters such as generic Zocor (simvastatin). Independents continue to claim harm due to the “low and slow” (their words) payments by PDPs under Medicare Part D. BTW, I still maintain that Wal-Mart's $4 generic program will hurt supermarkets and independents more than major chains such as CVS Corp (CVS) or Walgreens (NYSE WAG).

The retail pharmacy industry now realizes that the reimbursement debate will not be fought solely on the basis of economics. Just look at the TRICARE situation. NACDS and NCPA lobbied successfully to remove mail order provisions from the 2007 National Defense Authorization Act even though the Congressional Budget Office estimated that the Pentagon could save $1.5 billion from 2007 to 2016 if the mail-order-pharmacy option was signed into law. Similar efforts are now underway to mitigate the effects of the projected $8.4 billion savings from the Deficit Reduction Act.

Monday, January 01, 2007

Happy New Year! I’m back from vacation – tanned, rested, and ready for 2007! (Well, OK, not really tan, but definitely rested and ready. )

Here is the first of four posts about major health care trends that I am watching for 2007 along with links to relevant posts from last year.

Trend 1: Pharmacy Infrastructure Integration

I expect more consolidation within the U.S. pharmaceutical infrastructure – the network of companies that facilitate dispensing and payment of pharmaceuticals -- PBMs, GPOs, wholesalers, retailers, providers, et al. These formerly distinct sectors now find themselves competing for similar profit streams due to cross-industry consolidation. The CVS Corp (CVS) - Caremark Rx Inc (NYSE:CMX) deal, if not undone by a more traditional horizontal combination with Express Scripts Inc (NASDAQ:ESRX), illustrates this trend.

In 2007, I’d expect even more creative combinations as profit models continue to converge. I would not be surprised to see a Big 3 drug wholesaler acquire an acute care GPO such as Amerinet, Novations, Premier, or MedAssets, or a chain pharmacy to combine with a provider a la CVS Corp (NYSE:CVS) and MinuteClinic. However, I do not expect pharmaceutical manufacturers to forward-integrate into the pharmacy infrastructure so as to avoid strategic debacles such as Merck-Medco.

P.S. I was fortunate to vacation in Jamaica with my family in December. You may be surprised – or perhaps disappointed – that I was not perusing pages from the December 22 Federal Register on the beach. Instead, I enjoyed Walter Isaacson’s highly readable and thoroughly fascinating biography of Ben Franklin, Philadelphia’s second most famous citizen (after Rocky Balboa, of course).

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